International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS)

Issues and solutions for the pharmaceuticals and life sciences industries April 2019

pharma

PwC International Financial Reporting Standards (IFRS)

Foreword

The IFRS Issues and solutions for the pharmaceuticals and life sciences industries is our collected insight on the application of International Financial Reporting Standards (IFRS) in this industry ? reflecting the practices of many practitioners in the pharmaceuticals and life sciences industry.

Peter Kartscher

Global Pharmaceuticals and Life Sciences Assurance Leader

This edition has been updated in 2019 to reflect changes in IFRS and interpretations as at that date. Each solution is based on a specified set of circumstances. Companies must evaluate their own facts and circumstances which might well differ from those in these solutions. Creativity in licensing, manufacturing and research and development arrangements, for example, lead to variations in underlying substance and corporate structures, requiring an individual case-by-case assessment of the accounting implications, which can be complex.

We hope you continue to find this publication useful in understanding the accounting for common transactions that you encounter in your business. By stimulating debate of these topics through this publication, we hope we will encourage consistent practices by the pharmaceuticals and life sciences industries in financial reporting under IFRS. This consistency will be critical to the continued usefulness and transparency of pharmaceuticals and life sciences companies' financial reporting.

Acknowledgements

This publication would not have been possible without the input and cooperation of many people, both in the pharmaceutical industry and PwC specialists. Special thanks goes to Ruth Preedy, Andrea Allocco, Karsten Ganssauge, Larry Dodyk, Jennifer Straube, Janet Milligan and Giulia Montezemolo for their contribution in driving this project forward.

2 | Issues and solutions for the pharmaceuticals and life sciences industries

PwC International Financial Reporting Standards (IFRS)

Contents

1. R&D and intangible assets

6

1.1 Capitalisation of internal development costs

7

1.2Capitalisation of internal development costs when regulatory approval has been obtained in a similar market ?

8

Scenario 1

1.3Capitalisation of internal development costs when regulatory approval has been obtained in a similar market ?

9

Scenario 2

1.4Examples of development costs that can be capitalised

10

1.5Capitalisation of development costs for generics

12

1.6Capitalisation of development costs for biosimilars

13

1.7Accounting for marketing expenditure once development criteria are met

14

1.8Accounting for development expenditure once capitalisation criteria are met

15

1.9 Development of alternative indications

16

1.10Costs incurred for performance comparisons

17

1.11Development costs for a drug which will treat a small patient group

18

1.12 Patent protection costs

19

1.13 Priority review vouchers

20

1.14Exchange of intangible assets

21

1.15 Partial disposal of an intangible asset

22

1.16Intangible asset derecognition on out-license of rights

23

1.17Patent acquired in exchange for own shares

25

1.18 In-licence of technology

26

1.19In-licence of marketing rights for a drug in development

27

1.20In-licence of development-phase compound where the licensee continues to do the development work

29

1.21In-licence of development-phase compound where the licensor continues to do the development work

31

1.22Up-front payments to conduct research

32

1.23Accounting for research which results in a development candidate

33

1.24Third-party development of own intellectual property

34

1.25Joint development of own intellectual property

35

1.26Cost-plus contract research arrangements

36

1.27 Useful economic lives of intangibles

37

1.28 Commencement of amortisation

38

1.29Amortisation method of development ? intangible assets

39

1.30Amortisation life of intangibles

40

1.31 Indefinite-lived intangible assets

41

3 | Issues and solutions for the pharmaceuticals and life sciences industries

PwC International Financial Reporting Standards (IFRS)

1.32 Indicators of impairment ? intangible assets

42

1.33Indicators of impairment ? property, plant and equipment

43

1.34Acquired compound where development is terminated

44

1.35Acquired compound used in combination therapy

45

1.36 Impairment of IPR&D prior to approval

46

1.37Impairment of development costs after regulatory approval

47

1.38Single market impairment accounting

48

1.39 Reversals of impairment losses (cost model)

49

1.40 Impairment testing and useful life

50

2 Manufacturing & supply chain

51

2.1 Treatment of trial batches in development

52

2.2 Treatment of validation batches

53

2.3 Validation costs of inventory

54

2.4 Recognition of raw materials as inventory

55

2.5Pre-launch inventory produced before regulatory approval

56

2.6Treatment of inventory of `in-development' drugs after filing

57

2.7Treatment of inventory of `in-development' generic drugs

58

2.8Accounting for vaccine cultures in manufacturing of pharmaceutical products

59

2.9 Exclusive supply agreements ? IFRS 16

60

2.10 Indicators of impairment ? inventory

61

3 Funding for R&D

62

3.1Capitalisation of interest on loans received to fund R&D

63

3.2 Funding for Phase III trials

64

3.3Loans and grants from government/charitable organisations to fund R&D

66

3.4Venture capital company funds Phase III through a new company

67

4 Business combinations & asset acquisitions

69

4.1 Acquisition of a single compound

70

4.2Acquisition of compound and scientists transfer

71

4.3 Accounting for acquired IPR&D

72

4.4Acquisition of a Biotech entity ? one IPR&D project (amended IFRS 3)

73

4.5Acquisition of a Biotech entity ? more than one IPR&D project (amended IFRS 3)

74

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PwC International Financial Reporting Standards (IFRS)

5 Revenue ? IFRS 15

5.1 Contract term 5.2Contract modifications 5.3Scope considerations when accounting for collaboration arrangements 5.4 Post-development phase obligations 5.5 Assessing distinct promises ? (licence and manufacturing) 5.6 Accounting for reimbursement of costs 5.7 Estimating variable consideration where there are contingent payments 5.8 Revenue recognition for sales to customers with a history of long delays in payment 5.9 Rebates on volume purchases 5.10Outcome-based pay-for-performance arrangements 5.11 Contract manufacturing 5.12Contract for development services 5.13Development services with Up-front and contingent payments 5.14Sale of an intangible asset in exchange for listed shares 5.15 Receipts for out-licensing 5.16Contingent payments based on first commercial sale 5.17Licence of intellectual property is predominant 5.18Out-licence of development-phase compound where the licensee does the development work 5.19Out-licence of development-phase compound where the licensor continues to do the development work

6 Presentation and disclosure

6.1 Presentation of capitalised development costs 6.2 Accounting for promotional campaigns 6.3 Advertising and promotion costs 6.4 Accounting for the cost of free samples 6.5Classification of co-promotion royalties 6.6Segmental reporting of internal research and development 6.7Segmental reporting of research and development services 6.8 Disclosure of R&D when reported to CODM

7 Contacts

75

76 77 78 79 80 82 83 84 85 87 88 90 91 93 95 97 98 99 101

104

105 106 107 108 109 110 111 112

113

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